the law corporate finance and management

  

The Law, Corporate

Finance, and Management

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  Table of Contents

  

  

  

  

  

  

  About the Authors

Don Mayer

  Don Mayer teaches law, ethics, public policy, and sustainability at the Daniels College of Business, University of Denver, where he is professor in residence. His research focuses on the role of business in creating a more just, sustainable, peaceful, and productive world. With James O’Toole, Professor Mayer has coedited and contributed content to Good Business:

  Exercising Effective and Ethical Leadership (Routledge,

  2010). He is also coauthor of International Business Law:

  Cases and Materials, which is in its fifth edition with

  Pearson Publishing Company. He recently served as the first Arsht Visiting Ethics Scholar at the University of Miami.

  After earning a philosophy degree from Kenyon College and a law degree from Duke University Law School, Professor Mayer served as a Judge Advocate General’s (JAG) Corps officer in the United States Air Force during the Vietnam conflict and went into private practice in North Carolina. In 1985, he earned his LLM in international and comparative law at the Georgetown University Law Center. Later that year, he began his academic career at Western Carolina University and proceeded to become a full professor at Oakland University in Rochester, Michigan, where he taught for many years before moving to the University of Denver. He has taught as a visitor at California State Polytechnic University, the University of Michigan, the Manchester Business School Worldwide, and Antwerp Management School.

  Professor Mayer has won numerous awards from the Academy of Legal Studies in Business, including the Hoeber Award for best article in the American Business Law

  

Journal, the Maurer Award for best article on business ethics (twice), and the Ralph

  Bunche Award for best article on international business law (three times). His work has been published in many journals and law reviews but most often in American

  Business Law Journal, the Journal of Business Ethics, and the Business Ethics Quarterly.

  Daniel M. Warner

  Daniel M. Warner is a magna cum laude graduate of the University of Washington, where—following military service—he also attended law school. In 1978, after several years of civil practice, he joined the faculty at the College of Business and Economics at Western Washington University, where he is now a professor of business legal studies in the Accounting Department. He has published extensively, exploring the intersection of popular culture and the law, and has received the College of Business Dean’s Research Award five times for “distinguished contributions in published research.” Professor Warner served on the Whatcom County Council for eight years (two years as its chair). He has served on the Faculty Senate and on various university and college committees, including as chairman of the University Master Plan Committee. Professor Warner has also been active in state bar association committee work and in local politics, where he has served on numerous boards and commissions for over thirty years.

  George J. Siedel

  George J. Siedel’s research addresses legal issues that relate to international business law, negotiation, and dispute resolution. Recent publications focus on proactive law and the use of law to gain competitive advantage. His work in progress includes research on the impact of litigation on large corporations and the use of electronic communication as evidence in litigation.

  Professor Siedel has been admitted to practice before the United States Supreme Court and in Michigan, Ohio, and Florida. Following graduation from law school, he worked as an attorney in a professional corporation. He has also served on several boards of directors and as associate dean of the University of Michigan Business School.

  The author of numerous books and articles, Professor Siedel has received several research awards, including the Faculty Recognition Award from the University of Michigan and the following awards from the Academy of Legal Studies in Business:

  International Business Education and Research selected a case written by Professor Siedel for its annual International Case Writing Award. His research has been cited by appellate courts in the United States and abroad, including the High Court of Australia.

  Professor Siedel has served as visiting professor of business law at Stanford University, visiting professor of business administration at Harvard University, and Parsons fellow at the University of Sydney. He has been elected a visiting fellow at Cambridge University’s Wolfson College and a life fellow of the Michigan State Bar Foundation. As a Fulbright scholar, Professor Siedel held a distinguished chair in the humanities and social sciences.

  Jethro K. Lieberman

  Jethro K. Lieberman is professor of law and vice president for academic publishing at New York Law School, where he has taught for more than twenty-five years. He earned his BA in politics and economics from Yale University, his JD from Harvard Law School, and his PhD in political science from Columbia University. He began his teaching career at Fordham University School of Law. Before that, he was vice president at what is now the International Institute for Conflict Prevention and Resolution (CPR). For nearly ten years, he was legal affairs editor of Business Week magazine. He practiced antitrust and trade regulation law at a large Washington law firm and was on active duty as a member of the Navy’s Judge Advocate General’s (JAG) Corps during the Vietnam era. He is the author of The Litigious Society (Basic Books), the winner of the American Bar Association’s top literary prize, the Silver Gavel, and the author of A Practical

  Companion to the Constitution: How the Supreme Court Has Ruled on Issues from Abortion to Zoning (University of California Press), among many other books. He is a long-time

  letterpress printer and proprietor of The Press at James Pond, a private press, and owner of the historic Kelmscott-Goudy Press, an Albion handpress that was used to print the Kelmscott Press edition of Geoffrey Chaucer’s Canterbury Tales in the 1890s.

  Alyssa Rose Martina (Contributing Author)

  Alyssa Rose Martina is an entrepreneur, businesswoman, professional writer, and educator. She started her first company, Metro Parent Magazine, in 1986, after nation’s largest state judicial circuits. As a dedicated entrepreneur, she saw an opportunity to fill a void for parents and established a family magazine. Today, more than 263,000 readers rely on Metro Parent as their “parenting bible.” Alyssa’s company, Metro Parent Publishing Group, also produces several ancillary publications: Metro Baby, a biannual pregnancy resource guide; Going Places, a biannual guide to family fun in Southeast Michigan; Party Book, an event planning resource guide; and Special Edition, a resource for parents regarding children with special needs. To offer support and resources to African American families, Alyssa saw an opportunity to establish a second publishing company catered to the African American market. In 1999, the company was launched and today, BLAC Magazine, which covers “Black Life, Arts and Culture,” reaches over sixty thousand readers in the Detroit region. This monthly lifestyle publication explores and celebrates the rich cultural fabric of African American life in southeast Michigan, under the guidance of African American community leaders and educators and a distinguished panel of advisors who form an advisory council.

  Alyssa presents lectures and workshops to various business and community groups around the country on topics such as innovation, strategy, entrepreneurship, and next-level thinking. She also serves as a consultant on events marketing for several of her sister publications throughout the country. In April 2010, Alyssa received her MBA with highest distinction from the University of Michigan’s Ross School of Business. She has guest-lectured on entrepreneurial/legal issues at Ross and has also served as a teaching assistant. She has written a number of parenting articles and a children’s book, and she was a weekly columnist for the Detroit News. Alyssa has served as an editor and reviewer for several business law articles and manuscripts. Alyssa teaches at Walsh School of Business as an adjunct professor. Her course is focused on legal issues in business for MBA students.

  Acknowledgments

  The authors would like to thank the following colleagues who have reviewed the text and provided comprehensive feedback and suggestions for improving the material:

• Jennifer Barger Johnson, University of Central Oklahoma • Dawn M. Bradanini, Lincoln College • Larry Bumgardner, Pepperdine University • Michael Edward Chaplin, California State University–Northridge
• Nigel Cohen, University of Texas–Pan American • Mark Edison, North Central College • Mark Gideon, University of Maryland • Henry J. Hastings, Eastern Michigan University • Henry Lowenstein, Coastal Carolina University • Tanya Marcum, Bradley University • Harry McCracken, California Lutheran University • Robert Miller, Dominican University • Leon Moerson, George Washington University • Tonia Hat Murphy, University of Notre Dame • Bart Pachino, California State University–Northridge
• Kimber J. Palmer, Texas A&M University–International
• Lawrence Price, Saint Mary’s University of Minnesota • Kurt Saunders, California State University–Northridge
• Ron Washburn, Bryant University • Ruth Weatherly, Simpson College • Eric Yordy, Northern Arizona University

  Preface

  Our goal is to provide students with a textbook that is up to date and comprehensive in its coverage of legal and regulatory issues—and organized to permit instructors to tailor the materials to their particular approach. This book engages students by relating law to everyday events with which they are already familiar (or with which they are familiarizing themselves in other business courses) and by its clear, concise, and readable style. (An earlier business law text by authors Lieberman and Siedel was hailed “the best written text in a very crowded field.”) This textbook provides context and essential concepts across the entire range of legal issues with which managers and business executives must grapple. The text provides the vocabulary and legal acumen necessary for businesspeople to talk in an educated way to their customers, employees, suppliers, government officials—and to their own lawyers.

  Traditional publishers often create confusion among customers in the text selection process by offering a huge array of publications. Once a text is selected, customers might still have to customize the text to meet their needs. For example, publishers usually offer books that include either case summaries or excerpted cases, but some instructors prefer to combine case summaries with a few excerpted cases so that students can experience reading original material. Likewise, the manner in which most conventional texts incorporate video is cumbersome because the videos are contained in a separate library, which makes access more complicating for instructors and students.

  The model eliminates the need for “families” of books (such as the ten Miller texts mentioned below) and greatly simplifies text selection. Instructors have only to select between our Legal Aspects of Corporate Management and

  

Finance volumes of the text and then click on the features they want (as opposed to

  trying to compare the large number of texts and packages offered by other publishers). In addition to the features inherent in any Flat World publication, this book offers these unique features:

• Cases are available in excerpted and summarized format, thus enabling instructors to easily “mix and match” excerpted cases with case summaries.
• Links to forms and uniform laws are embedded in the text. For

various sections of the Uniform Commercial Code, which is available at .

• Likewise, many sample legal forms are readily available online. For example, the chapter on employment law refers to the type of terms commonly found in a standard employment agreement, examples of which can be found at

  

• Every chapter contains overviews that include the organization and coverage, a list of key terms, chapter summaries, and self-test questions in multiple-choice format (along with answers) that are followed by additional problems with answers available in the Instructors’ Manual.
• In addition to standard supplementary materials offered by other texts, students have access to electronic flash cards, proactive quizzes, and audio study guides.

Chapter 1 Introduction to Law and Legal Systems L E A R N I N G O B J E C T I V E S After reading this chapter, you should be able to do the following:

  1. Distinguish different philosophies of law—schools of legal thought—and explain their relevance.

  2. Identify the various aims that a functioning legal system can serve.

  3. Explain how politics and law are related.

  4. Identify the sources of law and which laws have priority over other laws.

  5. Understand some basic differences between the US legal system and other legal systems.

  Law has different meanings as well as different functions. Philosophers have considered issues of justice and law for centuries, and several different approaches, or schools of legal thought, have emerged. In this chapter, we will look at those different meanings and approaches and will consider how social and political dynamics interact with the ideas that animate the various schools of legal thought. We will also look at typical sources of “positive law” in the United States and how some of those sources have priority over others, and we will set out some basic differences between the US legal system and other legal systems.

1.1 What Is Law?

  Law is a word that means different things at different times. Black’s Law Dictionary

  says that law is “a body of rules of action or conduct prescribed by controlling authority, and having binding legal force. That which must be obeyed and followed by citizens subject to sanctions or legal consequence is a law.”Black’s Law Dictionary, 6th ed., s.v. “law.”

  Functions of the Law

  In a nation, the law can serve to (1) keep the peace, (2) maintain the status quo, (3) preserve individual rights, (4) protect minorities against majorities, (5) promote social justice, and (6) provide for orderly social change. Some legal systems serve these purposes better than others. Although a nation ruled by an authoritarian government may keep the peace and maintain the status quo, it may also oppress minorities or political opponents (e.g., Burma, Zimbabwe, or Iraq under Saddam Hussein). Under colonialism, European nations often imposed peace in countries whose borders were somewhat arbitrarily created by those same European nations. Over several centuries prior to the twentieth century, empires were built by Spain, Portugal, Britain, Holland, France, Germany, Belgium, and Italy. With regard to the functions of the law, the empire may have kept the peace—largely with force—but it changed the status quo and seldom promoted the native peoples’ rights or social justice within the colonized nation.

  In nations that were former colonies of European nations, various ethnic and tribal factions have frequently made it difficult for a single, united government to rule effectively. In Rwanda, for example, power struggles between Hutus and Tutsis resulted in genocide of the Tutsi minority. (Genocide is the deliberate and systematic killing or displacement of one group of people by another group. In 1948, the international community formally condemned the crime of genocide.) In nations of the former Soviet Union, the withdrawal of a central power created power vacuums that were exploited by ethnic leaders. When Yugoslavia broke up, the different ethnic groups—Croats, Bosnians, and Serbians—fought bitterly for home turf rather than share power. In Iraq and Afghanistan, the effective blending of different groups of families, tribes, sects, and ethnic groups into a national governing body that shares power remains to be seen.

  Law and Politics

  In the United States, legislators, judges, administrative agencies, governors, and diverse group of nongovernment organizations (NGOs) such as the American Petroleum Institute, the Sierra Club, and the National Rifle Association. In the fifty states, judges are often appointed by governors or elected by the people. The process of electing state judges has become more and more politicized in the past fifteen years, with growing campaign contributions from those who would seek to seat judges with similar political leanings.

  In the federal system, judges are appointed by an elected official (the president) and confirmed by other elected officials (the Senate). If the president is from one party and the other party holds a majority of Senate seats, political conflicts may come up during the judges’ confirmation processes. Such a division has been fairly frequent over the past fifty years.

1 In most nation-states (as countries are called in international law), knowing who

  has power to make and enforce the laws is a matter of knowing who has political power; in many places, the people or groups that have military power can also command political power to make and enforce the laws. Revolutions are difficult and contentious, but each year there are revolts against existing political-legal authority; an aspiration for democratic rule, or greater “rights” for citizens, is a recurring theme in politics and law.

  K E Y T A K E A W A Y

  Law is the result of political action, and the political landscape is vastly different from nation to nation. Unstable or authoritarian governments often fail to serve the principal functions of law.

  E X E R C I S E S

  1. Consider Burma (named Myanmar by its military rulers). What political rights do you have that the average Burmese citizen does not?

  2. What is a nongovernment organization, and what does it have to do with government? Do you contribute to (or are you active in) a

  1. The basic entities that comprise the international

  nongovernment organization? What kind of rights do they espouse,

  legal system. Countries, states,

  what kind of laws do they support, and what kind of laws do they

  and nations are all roughly

  oppose?

  synonymous. State can also be used to designate the basic units of federally united states, such as in the United States of America, which is a nation-

1.2 Schools of Legal Thought L E A R N I N G O B J E C T I V E S

  Legal Positivism: Law as Sovereign Command

  6. Legislative directives, having the form of general rules that are to be followed in the nation-state or its subdivisions. Statutes are controlling over judicial decisions or common law, but are inferior to (and controlled by) constitutional

  5. The authority within any nation-state. Sovereignty is what sovereigns exercise. This usually means the power to make and enforce laws within the nation-state.

  4. A jurisprudence that emphasizes a law that transcends positive laws (human laws) and points to a set of principles that are universal in application.

  3. A jurisprudence that focuses on the law as it is—the command of the sovereign.

  2. The philosophy of law. There are many philosophies of law and thus many different jurisprudential views.

  —executive orders, regulations, or judicial decisions—in a fairly precise way to find out what the law says. For example, we could look at the posted speed limits on most US highways and conclude that the “correct” or “right” speed is no more than fifty-five miles per hour. Or we could look a little deeper and find out how the written law is usually applied. Doing so, we might conclude that sixty-one miles per hour is generally allowed by most state troopers, but that occasionally someone gets ticketed for doing fifty-seven miles per hour in a fifty-five miles per hour zone. Either approach is empirical, even if not rigorously scientific. The first approach, examining in a precise way what the rule itself says, is sometimes known as the “positivist” school of legal thought. The

  6

  —such as a king, a president, or a dictator—who has power within a defined area or territory. Positivism is a philosophical movement that claims that science provides the only knowledge precise enough to be worthwhile. But what are we to make of the social phenomena of laws? We could examine existing statutes

  5

  As legal philosopher John Austin concisely put it, “Law is the command of a sovereign.” Law is only law, in other words, if it comes from a recognized authority and can be enforced by that authority, or sovereign

  1. Distinguish different philosophies of law—schools of legal thought—and explain their relevance.

  2. Explain why natural law relates to the rights that the founders of the US political-legal system found important.

  . Although there are others (see

  4

  and natural law

  3

  positivism

  , and the two main schools are legal

  2

  There are different schools (or philosophies) concerning what law is all about. Philosophy of law is also called jurisprudence

  4. Differentiate critical legal studies and ecofeminist legal perspectives from both natural law and legal positivist perspectives.

  3. Describe legal positivism and explain how it differs from natural law.

  , these two are the most influential in how people think about the law. principal actors who enforce the law—is akin to the “legal realist” school of thought (see .

  Positivism has its limits and its critics. New Testament readers may recall that King Herod, fearing the birth of a Messiah, issued a decree that all male children below a certain age be killed. Because it was the command of a sovereign, the decree was carried out (or, in legal jargon, the decree was “executed”). Suppose a group seizes power in a particular place and commands that women cannot attend school and can only be treated medically by women, even if their condition is life-threatening and women doctors are few and far between. Suppose also that this command is carried out, just because it is the law and is enforced with a vengeance. People who live there will undoubtedly question the wisdom, justice, or goodness of such a law, but it is law nonetheless and is generally carried out. To avoid the law’s impact, a citizen would have to flee the country entirely. During the Taliban rule in Afghanistan, from which this example is drawn, many did flee.

  The positive-law school of legal thought would recognize the lawmaker’s command as legitimate; questions about the law’s morality or immorality would not be important. In contrast, the natural-law school of legal thought would refuse to recognize the legitimacy of laws that did not conform to natural, universal, or divine law. If a lawmaker issued a command that was in violation of natural law, a citizen would be morally justified in demonstrating civil disobedience. For example, in refusing to give up her seat to a white person, Rosa Parks believed that she was refusing to obey an unjust law.

  Natural Law

  The natural-law school of thought emphasizes that law should be based on a universal moral order. Natural law was “discovered” by humans through the use of reason and by choosing between that which is good and that which is evil. Here is the definition of natural law according to the Cambridge Dictionary of Philosophy: “Natural law, also called the law of nature in moral and political philosophy, is an objective norm or set of objective norms governing human behavior, similar to the positive laws of a human ruler, but binding on all people alike and usually understood as involving a superhuman legislator.”Cambridge Dictionary of Philosophy, s.v. “natural law.” Both the US Constitution and the United Nations (UN) Charter have an affinity for the natural-law outlook, as it emphasizes certain objective norms and rights of individuals and nations. The US Declaration of Independence embodies a natural- law philosophy. The following short extract should provide some sense of the deep

  The Unanimous Declaration of the Thirteen United States of America

  July 4, 1776 When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

  We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the Pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.…

  The natural-law school has been very influential in American legal thinking. The idea that certain rights, for example, are “unalienable” (as expressed in the Declaration of Independence and in the writings of John Locke) is consistent with this view of the law. Individuals may have “God-given” or “natural” rights that government cannot legitimately take away. Government only by consent of the governed is a natural outgrowth of this view.

  Civil disobedience—in the tradition of Henry Thoreau, Mahatma Gandhi, or Martin Luther King Jr.—becomes a matter of morality over “unnatural” law. For example, in his “Letter from Birmingham Jail,” Martin Luther King Jr. claims that obeying an unjust law is not moral and that deliberately disobeying an unjust law is in fact a moral act that expresses “the highest respect for law”: “An individual who breaks a law that conscience tells him is unjust, and who willingly accepts the penalty of imprisonment in order to arouse the conscience of the community over its injustice, is in reality expressing the highest respect for law.…One who breaks an unjust law must do so openly, lovingly, and with a willingness to accept the penalty.”Martin Luther King Jr., “Letter from Birmingham Jail.” Legal positivists, on the other hand, would say that we cannot know with real effectively learn by just looking at what the written law says, or by examining how it has been applied. In response, natural-law thinkers would argue that if we care about justice, every law and every legal system must be held accountable to some higher standard, however hard that may be to define.

  It is easier to know what the law “is” than what the law “should be.” Equal employment laws, for example, have specific statutes, rules, and decisions about racial discrimination. There are always difficult issues of interpretation and decision, which is why courts will resolve differing views. But how can we know the more fundamental “ought” or “should” of human equality? For example, how do we

  know that “all men are created equal” (from the Declaration of Independence)?

  Setting aside for the moment questions about the equality of women, or that of slaves, who were not counted as men with equal rights at the time of the declaration—can the statement be empirically proven, or is it simply a matter of a priori knowledge? (A priori means “existing in the mind prior to and independent of experience.”) Or is the statement about equality a matter of faith or belief, not really provable either scientifically or rationally? The dialogue between natural-law theorists and more empirically oriented theories of “what law is” will raise similar questions. In this book, we will focus mostly on the law as it is, but not without also raising questions about what it could or should be.

  Other Schools of Legal Thought

  The historical school of law believes that societies should base their legal decisions today on the examples of the past. Precedent would be more important than moral arguments.

  The legal realist school flourished in the 1920s and 1930s as a reaction to the historical school. Legal realists pointed out that because life and society are constantly changing, certain laws and doctrines have to be altered or modernized in order to remain current. The social context of law was more important to legal realists than the formal application of precedent to current or future legal disputes. Rather than suppose that judges inevitably acted objectively in applying an existing rule to a set of facts, legal realists observed that judges had their own beliefs, operated in a social context, and would give legal decisions based on their beliefs and their own social context.

  The legal realist view influenced the emergence of the critical legal studies (CLS) school of thought. The “Crits” believe that the social order (and the law) is dominated by those with power, wealth, and influence. Some Crits are clearly influenced by the economist Karl Marx and also by distributive justice theory (see believes the wealthy have historically oppressed or exploited those with less wealth and have maintained social control through law. In so doing, the wealthy have perpetuated an unjust distribution of both rights and goods in society. Law is politics and is thus not neutral or value-free. The CLS movement would use the law to overturn the hierarchical structures of domination in the modern society.

  Related to the CLS school, yet different, is the ecofeminist school of legal thought. This school emphasizes—and would modify—the long-standing domination of men over both women and the rest of the natural world. Ecofeminists would say that the same social mentality that leads to exploitation of women is at the root of man’s exploitation and degradation of the natural environment. They would say that male ownership of land has led to a “dominator culture,” in which man is not so much a steward of the existing environment or those “subordinate” to him but is charged with making all that he controls economically “productive.” Wives, children, land, and animals are valued as economic resources, and legal systems (until the nineteenth century) largely conferred rights only to men with land. Ecofeminists would say that even with increasing civil and political rights for women (such as the right to vote) and with some nations’ recognizing the rights of children and animals and caring for the environment, the legacy of the past for most nations still confirms the preeminence of “man” and his dominance of both nature and women.

  K E Y T A K E A W A Y

  Each of the various schools of legal thought has a particular view of what a legal system is or what it should be. The natural-law theorists emphasize the rights and duties of both government and the governed. Positive law takes as a given that law is simply the command of a sovereign, the political power that those governed will obey. Recent writings in the various legal schools of thought emphasize long-standing patterns of domination of the wealthy over others (the CLS school) and of men over women (ecofeminist legal theory).

  E X E R C I S E S

  1. Vandana Shiva draws a picture of a stream in a forest. She says that in our society the stream is seen as unproductive if it is simply there, fulfilling the need for water of women’s families and communities, until engineers come along and tinker with it, perhaps damming it and using it for generating hydropower. The same is true of a forest, unless it is replaced with a monoculture plantation of a commercial species. A forest may very well be productive—protecting groundwater; creating oxygen; providing fruit, fuel, and craft materials for nearby inhabitants; and creating a habitat for animals that are also a valuable resource. She criticizes the view that if there is no monetary amount that can contribute to gross domestic product, neither the forest nor the river can be seen as a productive resource. Which school of legal thought does her criticism reflect?

  2. Anatole France said, “The law, in its majesty, forbids rich and poor alike from sleeping under bridges.” Which school of legal thought is represented by this quote?

  3. Adolf Eichmann was a loyal member of the National Socialist Party in the Third Reich and worked hard under Hitler’s government during World War II to round up Jewish people for incarceration—and eventual extermination—at labor camps like Auschwitz and Buchenwald. After an Israeli “extraction team” took him from Argentina to Israel, he was put on trial for “crimes against humanity.” His defense was that he was “just following orders.” Explain why Eichmann was not an adherent of the natural-law school of legal thought.

1.3 Basic Concepts and Categories of US Positive Law L E A R N I N G O B J E C T I V E S 1. In a general way, differentiate contract law from tort law.

  2. Consider the role of law in supporting ethical norms in our society.

  3. Understand the differing roles of state law and federal law in the US legal system.

  4. Know the difference between criminal cases and civil cases.

  Most of what we discuss in this book is positive law—US positive law in particular. We will also consider the laws and legal systems of other nations. But first, it will be useful to cover some basic concepts and distinctions.

  Law: The Moral Minimums in a Democratic Society

  The law does not correct (or claim to correct) every wrong that occurs in society. At a minimum, it aims to curb the worst kind of wrongs, the kinds of wrongs that violate what might be called the “moral minimums” that a community demands of its members. These include not only violations of criminal law (see

   but also torts (see and

  broken promises (see

   ). Thus it may be wrong to refuse to

  return a phone call from a friend, but that wrong will not result in a viable lawsuit against you. But if a phone (or the Internet) is used to libel or slander someone, a tort has been committed, and the law may allow the defamed person to be compensated.

  There is a strong association between what we generally think of as ethical behavior and what the laws require and provide. For example, contract law upholds society’s sense that promises—in general—should be kept. Promise-breaking is seen as unethical. The law provides remedies for broken promises (in breach of contract cases) but not for all broken promises; some excuses are accepted when it would be reasonable to do so. For tort law, harming others is considered unethical. If people are not restrained by law from harming one another, orderly society would be undone, leading to anarchy. Tort law provides for compensation when serious injuries or harms occur. As for property law issues, we generally believe that private ownership of property is socially useful and generally desirable, and it is generally protected (with some exceptions) by laws. You can’t throw a party at my property may be limited by law; I can’t, without the public’s permission, operate an incinerator on my property and burn heavy metals, as toxic ash may be deposited throughout the neighborhood.

  The Common Law: Property, Torts, and Contracts

  Even before legislatures met to make rules for society, disputes happened and judges decided them. In England, judges began writing down the facts of a case and the reasons for their decision. They often resorted to deciding cases on the basis of prior written decisions. In relying on those prior decisions, the judge would reason that since a current case was pretty much like a prior case, it ought to be decided

  7

  the same way. This is essentially reasoning by analogy. Thus the use of precedent

  8

  in common-law cases came into being, and a doctrine of stare decisis (pronounced STAR-ay-de-SIGH-sus) became accepted in English courts. Stare decisis means, in Latin, “let the decision stand.” Most judicial decisions that don’t apply legislative acts (known as statutes) will involve one of three areas of law—property, contract, or tort. Property law deals with the rights and duties of those who can legally own land (real property), how that ownership can be legally confirmed and protected, how property can be bought and sold, what the rights of tenants (renters) are, and what the various kinds of “estates” in land are (e.g., fee simple, life estate, future interest, easements, or rights of way). Contract law deals with what kinds of promises courts should enforce. For example, should courts enforce a contract where one of the parties was intoxicated, underage, or insane? Should courts enforce a contract where one of the parties seemed to have an unfair advantage? What kind of contracts would have to be in writing to be enforced by courts? Tort law deals with the types of cases that involve some kind of harm and or injury between the plaintiff and the defendant when no contract exists. Thus if you are libeled or a competitor lies about your product, your remedy would be in tort, not contract.

  The thirteen original colonies had been using English common law for many years, and they continued to do so after independence from England. Early cases from the

7. A prior judicial decision that is

  first states are full of references to already-decided English cases. As years went by,

  either binding or persuasive,

  many precedents were established by US state courts, so that today a judicial

  and as such, provides a rule useful in making a decision in

  opinion that refers to a seventeenth- or eighteenth-century English common-law the case at hand. case is quite rare.

  8. Latin, for “let the decision stand.” By keeping within the

  Courts in one state may look to common-law decisions from the courts of other

  rule of a prior judicial decision,

a court follows “precedent” by states where the reasoning in a similar case is persuasive. This will happen in “cases

letting the prior decision

  of first impression,” a fact pattern or situation that the courts in one state have

  govern the result in the case at on a certain kind of case, lower courts in that state will always follow the rule set forth by their highest court.

  

State Courts and the Domain of State Law

  In the early years of our nation, federal courts were not as active or important as state courts. States had jurisdiction (the power to make and enforce laws) over the most important aspects of business life. The power of state law has historically included governing the following kinds of issues and claims:

• Contracts, including sales, commercial paper, letters of credit, and secured transactions
• Torts • Property, including real property, bailments of personal property

  (such as when you check your coat at a theater or leave your clothes with a dry cleaner), trademarks, copyrights, and the estates of decedents (dead people)

• Corporations • Partnerships • Domestic matters, including marriage, divorce, custody, adoption, and visitation
• Securities law
• Environmental law
• Agency law, governing the relationship between principals and their agents.
• Banking • Insurance Over the past eighty years, however, federal law has become increasingly important in many of these areas, including banking, securities, and environmental law.

  Civil versus Criminal Cases

  Most of the cases we will look at in this textbook are civil cases. Criminal cases are certainly of interest to business, especially as companies may break criminal laws. A criminal case involves a governmental decision—whether state or federal—to prosecute someone (named as a defendant) for violating society’s laws. The law establishes a moral minimum and does so especially in the area of criminal laws; if you break a criminal law, you can lose your freedom (in jail) or your life (if you are convicted of a capital offense). In a civil action, you would not be sent to prison; in the worst case, you can lose property (usually money or other assets), such as when to the plaintiffs or when Pennzoil won a $10.54 billion verdict against Texaco (see .

  9

  10 Some of the basic differences between civil law and criminal law cases are illustrated in .

Table 1.1 Differences between Civil and Criminal Cases

  Civil Cases Criminal Cases Plaintiff brings case; defendant must Prosecutor brings case; defendant

  Parties answer or lose by default may remain silent

  Proof Preponderance of evidence Beyond a reasonable doubt To settle disputes peacefully, usually

  Reason To maintain order in society between private parties To punish the most blameworthy To deter serious wrongdoing

  Remedies Money damages (legal remedy) Fines, jail, and forfeitures Injunctions (equitable remedy) Specific performance (equity)

  Regarding plaintiffs and prosecutors, you can often tell a civil case from a criminal case by looking at the caption of a case going to trial. If the government appears first in the caption of the case (e.g., U.S. v. Lieberman, it is likely that the United States is prosecuting on behalf of the people. The same is true of cases prosecuted by state district attorneys (e.g., State v. Seidel). But this is not a foolproof formula. Governments will also bring civil actions to collect debts from or settle disputes with individuals, corporations, or other governments. Thus U.S. v. Mayer might be a

9. In contrast to criminal law, the

  collection action for unpaid taxes, or U.S. v. Canada might be a boundary dispute in

  law that governs noncriminal

  the International Court of Justice. Governments can be sued, as well; people

  disputes, such as in lawsuits (as

opposed to prosecutions) over occasionally sue their state or federal government, but they can only get a trial if

contract disputes and tort

  the government waives its sovereign immunity and allows such suits. Warner v. U.S.,

  claims. In contrast to common

  for example, could be a claim for a tax refund wrongfully withheld or for damage

  law, civil law is part of the

  caused to the Warner residence by a sonic boom from a US Air Force jet flying

  continental European tradition dating back to Roman law.

  overhead.

  10. That body of law in any nation- state that defines offenses against society as a whole, punishable by fines,

  Substance versus Procedure

  Many rules and regulations in law are substantive, and others are procedural. We are used to seeing laws as substantive; that is, there is some rule of conduct or behavior that is called for or some action that is proscribed (prohibited). The substantive rules tell us how to act with one another and with the government. For example, all of the following are substantive rules of law and provide a kind of command or direction to citizens:

• Drive not more than fifty-five miles per hour where that speed limit is posted.
• Do not conspire to fix prices with competitors in the US market.
• Do not falsely represent the curative effects of your over-the-counter herbal remedy.
• Do not drive your motor vehicle through an intersection while a red traffic signal faces the direction you are coming from.
• Do not discriminate against job applicants or employees on the basis of their race, sex, religion, or national origin.
• Do not discharge certain pollutants into the river without first getting a discharge permit.